Dealing with student loans is often a complex, confusing, and frustrating experience. However, there are ways to make dealing with your student loans easier, usually by consolidating your student loans.
However, consolidating your student loans isn’t the only method you can use to simplify your payments. Can you refinance federal student loans? We’ll discuss the answer to that and other questions below.
What Is Student Loan Consolidation?
People often use the words consolidation and refinancing interchangeably, but they are very different. Consolidating your loans means that your loans are combined into one monthly payment, and you only have to pay one servicer. This helps you keep track of your loans if you have more than one student loan. There are two types of consolidation loans: federal direct consolidation loans and private consolidation loans.
The private consolidation loan allows you to consolidate both federal and private student loans. The terms may allow you to lower your interest rate and/or lower your monthly payment by extending the repayment term. The federal direct consolidation loan won’t lower your interest rate and doesn’t consolidate private student loans.
What Is Student Loan Refinancing?
Can you refinance federal student loans? While you can refinance student loans through a private lender, you can’t refinance your student loans through the federal government. You can only consolidate your federal student loans. When refinancing loans, the private lender pays off your existing loans and provides you with a new loan with new terms. According to Lantern by SoFi, “Any other time, federal loans have specific paths to forbearance and deferment, although in most cases, interest accrues.”
If you refinance, you risk losing benefits, such as interest-free payment postponements, flexible repayment plans, and potential loan forgiveness. Weigh all the pros and cons before deciding which path is best for you.
Benefits Of Consolidation
If you choose to consolidate your loans, you lower your monthly payments by extending your loan repayment term, up to 30 years,. You only have to worry about a single loan payment. Consolidating your federal loans allow you to keep the benefits listed above, as well as the repayment options and other benefits. You can also switch to a different servicer when you consolidate if you don’t like your current servicer.
Benefits Of Refinancing
- You’ll be able to release a cosigner from your original loan
- Lower interest rate
- Lower monthly payment by extending your repayment term
Drawbacks of Refinancing
- You forfeit the benefits and protections that federal student loans provide
- You likely become ineligible for an interest reduction for loans you had before military enlistment
- You won’t be able to defer payments without interest accrual for up to three years
- You increase your total interest costs
- You extend the time for which you have the loan burden
Whether you’re thinking about refinancing or consolidating your federal student loans, it’s imperative that you understand the benefits and drawbacks of each choice. Lantern by SoFi is here to help you with your student loan refinancing options, and you can use our handy tool that lets you compare student loan refinance rates.